What is a Fixed Deposit (FD) | Types of Fixed Deposits

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Fixed Deposits are one of the most popular savings schemes in India. An FD is a financial instrument offered by banks and post offices (e.g. India Post) that lets people deposit a certain sum of money for a fixed period of time and earn a fixed interest rate. There are many types of FDs that you can look at depending on your financial goals. In this comprehensive guide, we will take you through some important things you need to know about FDs.

What is a FD?

FD full form is Fixed Deposit. It is type of investment in which an individual invests a lump sum amount for a specific period of time with a bank. The amount deposited in the FD earns interest at a fixed rate which is set at the time of the account opening. FD holders can choose to receive the interest earned either monthly, quarterly, half-yearly or annually as per their preference.

Fixed Deposits are popular as they are one of the safest investment options available in the market. The returns are guaranteed and there is no real risk of a capital loss. Moreover, they offer a better rate of interest when compared to Savings Accounts. This makes Fixed Deposits a safe yet attractive investment option for anyone looking to earn stable and predictable returns. Some tax-saving FDs can also help to save taxes.

How does an FD work?

When individuals open an FD Account, they need to deposit a specific amount of money for a predetermined period. The amount deposited should not be withdrawn until the maturity of the deposit. The period of investment can range from 7 days to 10 years, depending on the investor’s preference.

The interest rate offered on an FD depends on the period of investment and the amount deposited. The longer the investment period, the higher the interest rate and higher the interest earned consequently. The interest earned on an FD gets credited in the investor's Savings Account (most banks require deposit holders to have a Savings Account with them) or gets reinvested in the FD at the end of the tenure.

Types of FDs

There are different types of FDs available in the market to cater to the different needs of the investors. Some popular options are:

Conventional FD: This is the most commonly availed FD where the investor deposits a lump sum amount for a fixed period and earns a fixed interest rate. The interest is paid out either monthly, quarterly, half-yearly or annually. With this FD, investors can earn fixed returns to meet a number of financial goals. You can easily open an FD with a bank through Internet Banking or the app. If you prefer transacting in person, feel free to visit your nearest bank branch or get in touch with your Relationship Manager.
FDs can also help you in other ways. If you need urgent funds, you can get an Overdraft facility against your FD, withdraw a part of your FD or liquidate it altogether. You can open an FD with a minimum deposit of Rs 10,000 and take out a loan of up to 90% of the principal and accrued interest.
Tax-saving FD: These FDs provide tax benefits under Section 80C of the Income Tax Act. Investors can claim a tax deduction of up to Rs 1.5 lakh by investing in the tax saving FDs. Investors can earn fixed returns while saving on the taxes. This FD can be opened in the same way as a regular FD.

Remember that the lock-in period is five years and the interest you earn is taxable and deducted at source (TDS). There are no premature withdrawals. You can receive interest payouts on a monthly or quarterly basis or reinvest them into the FD. A great feature of tax-saving FDs is that they can be held in a single or joint accounts.

Senior Citizen FD: These FDs are for senior citizens above the age of 60 years. The interest rates offered on senior citizen FDs are higher than the regular FDs. Many banks offer an additional interest rate of 0.10% on deposits above 5 years of tenure. The account holders can get a loan against their FDs and can even apply for a Credit Card against the same.

Other types of FDs:

Cumulative FD: In this FD, the interest earned is reinvested in the FD Account. The principal amount and the interest earned gets paid out at the end of the tenure. This option is best suited for investors who do not need regular interest payouts and want to earn a higher returns on their investment.
Non-cumulative FD: In this type of FD, the interest earned gets paid to the investor on a monthly, quarterly, half-yearly or annual basis, depending on their preference. This option is ideal for investors who need a regular income stream.

Fixed Deposits are a great tool to earn higher returns. However, it is important to research well, compare the interest rates and then choose the one that will meet your needs.

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